Greater Returns From Greener Buildings
Introducing a financially compelling way to achieve deep carbon cuts in large buildings
We’d like to share a groundbreaking way to reduce carbon emissions by 80% or more in almost any building that is fully self-funded using standard financing metrics. This approach delivers comfortable, future-proofed multi-family residential and multi-tenant commercial buildings at lower cost to occupants than for similar buildings. It also delivers above-market utility-grade returns to developers and landlords AND can be mandated for all applicable buildings with minor adjustments to established regulatory frameworks.
Sound too good to be true? With technologies that are available today, all the pieces are already in place to begin implementing it immediately. Indeed, the barrier is not technology or cost, the challenge is changing the way people think about buildings and shifting industry stakeholders from entrenched and siloed positions. Arguably, the greatest shift has to come from local governments who profess to be committed to addressing climate change but, at the regulatory level, still hold on to views and relationships that get in the way of meaningful market transformation.
Overcoming the biggest barrier to reducing carbon emissions in large buildings
Our new way of thinking starts by addressing the single most persistent barrier to ultra-low carbon buildings – the “split incentive.” The split incentive arises when developers of large buildings have to pay extra to install low carbon technologies but have difficulty passing on those costs to the occupants who receive the benefit of future lower energy costs. Financing methods exist to address the split incentive (e.g. energy service contracts and third party loan guarantees). However, the fact is that almost no ultra-low carbon buildings have been built even though these methods have existed for decades.
The best way to overcome the split incentive is to separate the ownership of a building’s energy system from the ownership of the building itself. The way to do this is to create an independent in-building energy utility that will own the energy system for the life of the building. The in-building utility’s technical experts work with the project team when the building is still at the design stage to ensure that the most cost-effective carbon reduction technologies are installed in the building.
Here’s how it works. Let’s assume that the costs of these ultra-low carbon technologies add 5% to the total construction cost of the building. The utility agrees to pay the developer for 100% of those costs. The developer builds a much more efficient building than originally planned, but does not pay one penny more. The developer is happy.
When construction is complete, the in-building utility takes ownership of the energy system and begins charging the occupants for their energy consumption. Their total energy cost is the same or less than they would have paid for energy if there was no energy utility and they get to live in a healthy and comfortable building. Condo owners pay about 20% less for their management fees because the energy system maintenance and repair costs are eliminated. The occupants are happy.
By applying state-of-the-art technologies such as heat recovery systems, energy controls, in-suite metering, and even extra building insulation, the utility can reduce its carbon emissions and its energy input costs by 80% or more. We know this is feasible because a building in Seattle, owned by the Bullit Foundation, is already achieving these kinds of savings using an in-building energy utility approach. Even if the utility charged 10% less than the going rate for its energy, it would still be able to generate a strong profit because its cost of energy would be 80% less than the going rate. The utility is happy.
Even after allocating funds for repairs, maintenance, capital asset replacement and administration along with a conservative contingency against risk, the utility would generate above market financial returns sufficient to attract a wide range of investors. The investors could include the developer, the building owner, the occupants, the local municipality or even traditional investment firms. The investors are happy.
So, by aligning the financial interests of all the stakeholders, the in-building energy utility can achieve dramatic GHG emission reductions without causing any stakeholder to pay more unless they are making an investment with a financial return. The only drawback to this approach is that it will take some time to get the word out to developers, architects, building owners and other stakeholders about how the system works and how they will benefit. Fortunately, we have another strategy for solving that problem.
A policy tool any city can use to accelerate the shift to ultra low carbon buildings at no cost
Almost every local government has set climate goals and it follows that they should be eager to accelerate the adoption of the in-building energy utility approach because it dramatically accelerates progress in achieving their climate goals at absolutely no taxpayer cost.
Here is where it starts getting really interesting because every municipality has access to an existing bylaw that, with some very minor tweaking, could compel the developers of every new building over 50,000 sq. ft. to participate in the setup of the in-building energy utility. That bylaw is a District Energy System (DES) bylaw.
The DES bylaw requires all new, large buildings in a specified area to hook up to a central energy system via underground pipes that run from the central plant to the buildings. However, if the term “system” was interpreted slightly more broadly the argument could be made that if the buildings were connected “fiscally” instead of “physically” that connection would constitute a “system” and therefore should be applicable. While this re-interpretation has not been definitively tested under the law, legal experts suggest that this interpretation or some minor variation of it should hold up. If the DES Bylaw could be applied to a financially connected district energy system, it would have a profound impact on our societal GHG efforts, and therefore should merit marshaling the best legal minds to create the appropriate legal wording.
Assuming they can, municipalities could use the DES bylaw to require every new building over 50,000 within their municipal boundaries to be connected together through the financial operation of in-building energy utilities in each building that achieve an ultra-low carbon emission standard.
As positive as this would be, it still has one important drawback and that is that the DES bylaw currently only applies to new buildings. However, just as the original DES bylaw was developed by creative minds we would hope that a similar burst of innovative thinking would permit the DES bylaw (or some similar new bylaw) to be applied to existing buildings as well.
Applying the concept to existing buildings as well as new ones
With existing buildings, it is still possible to set up an in-building energy utility that fully covers all energy retrofit costs in exchange for the right to recoup those costs by charging the tenants a utility energy rate. However, the carbon emission reductions would likely be about lower (50% reduction instead of 80% reduction) because it costs more to install certain technologies in an existing building. Nonetheless, because existing buildings account for 98% of all large buildings (as compared with 2% for new buildings), the inclusion of existing buildings in the DES bylaw would result in a monumental increase in GHG savings, as every single existing and new building could be required to participate.
While a mandatory DES bylaw may sound to some like a heavy-handed government approach, it is important to remember that under this system no party will incur any extra costs and everyone will be invited to become owners in the energy utility and generate a good financial return. With this solution, everyone is a winner.
David Van Seters, Helen Goodland and Nick Farina are the co-founders of eStream Energy Partners, an in-building energy utility company that is seeking to partner with developers and municipalities to facilitate this groundbreaking new way to achieve dramatic carbon emission reductions in large buildings.